If you are a Baby Boomer and looking forward to retirement, you might want to sit down with a pencil and a notepad. Retirement is a lot more complicated than it used to be, and not just because retirees in the post-pension era are having to take more responsibility for their investment allocations.

The investing environment itself is shifting—bonds have reached the end of a 30-year bull market, globalization means that events in faraway places have a direct impact on the stock and bond markets here, and Social Security—the single most important source of income for a majority of Americans—may be facing significant cuts in the years ahead.

So, before you quit your job and venture into the next stage of your life, stop for a minute to consider a set of numbers that could make the difference between retiring comfortably and having to move in with your adult children.

1. What is a reasonable estimate of your cost of living?

This should be obvious, but most Americans dramatically underestimate their living expenses. Be honest here, and thorough. What do you pay in rent or in property taxes and insurance? What about utilities? And what about medical expenses or insurance premiums not covered by Medicare?

What do you spend in a given month on restaurant dining and entertainment?

Don’t just look at your last month’s expenses and multiply by 12, as your expenses can vary wildly based on weather (utility bills) or based on holidays and birthdays. If you like buying your grandkids expensive Christmas presents, make sure to take these into account.

Whatever total figure you come up with, tack on an additional 25%. No matter how thorough you are, I promise you that you forgot something. And you want a little wiggle room to allow for unexpected expenses or for the occasional off-budget luxury.

The total you come up with here is the single most important figure; it’s the dollar amount you’ll need to generate from your portfolio investments and from Social Security.

2. How much can you expect to receive from Social Security?

According to the Social Security Administration, 53% of married couples and 74% of unmarried beneficiaries depend on Social Security for at least half of their income. A shocking 46% of unmarried beneficiaries rely on Social Security for 90% or more of their income.

To put it lightly, Social Security matters.

If you are near retirement age, you should receive regular correspondence from the Social Security Administration that outlines how much annual income you can expect to receive depending on what age you choose for retirement. If you’ve never been notified, contact your local Social Security office and ask.

To play it safe, assume that all of your Social Security benefits will be fully taxable. Currently, they are not. But given the fiscal position of the government, we should assume they soon will be. Better to err on the side of caution.

Marginal rates are always something of a moving target; we’ll use a rate of 28% for the purposes of this article. Take the income estimate from the Social Security Administration and multiply it by 0.72 (which what is left over after the 28% tax).

3. How much do your other investments need to earn to meet your retirement expenses?

Take your expense estimate from question one and subtract the after-tax Social Security payout from question two. Also subtract any other fixed income streams you expect, such as from a traditional pension or a trust. The amount left over is what you’ll need to generate from your investment portfolio.

This number is critical because it will determine what kind of returns you need to generate…and what kind of risk you can take.

Let’s look at an example. Let’s say you need $100,000 per year to maintain your lifestyle in retirement and that Social Security is on the hook to pay you $50,000. After taxes, that $50,000 becomes $36,000…meaning you’ll need your portfolio to throw off $64,000 in after-tax income. On a $1.5 million portfolio, that amounts to a return of 4.3% after tax, or a little less than 6% before tax (for now, I’ll assume all investment income is subject to the same 28% tax rate).

Is that a realistic figure for you? If not, you may need to downsize your retirement goals or postpone retirement for a few more years to build a bigger nest egg. Personally, I wouldn’t want to bank on generating a 6% return given that the 10-year Treasury yields less than half that. I wouldn’t be comfortable assuming much more than about 4%…which in our example here means that we need a larger portfolio or a smaller retirement.

Be honest with yourself here. It’s better to make any hard decisions today, while you can still make changes, than in retirement when it is too late.

4. What do you expect the inflation rate to be?

Inflation is the single most dangerous figure for would-be retirees because it is the one they never see coming. Inflation creates a nightmare scenario: your expenses rise while your income remains fixed.

The news here isn’t good. One of the easiest ways—or most cowardly, depending on your point of view—for the government to reduce its Social Security liabilities is to tinker with or eliminate cost of living adjustments. It’s a stealth form of taxation and one that hits retirees particularly hard.

To play it safe, we should assume that your Social Security payout will be constant—with no inflation adjustment at all.

This means that your investment portfolio will need to generate enough to make up the difference. The math here can get a little cumbersome, but bear with me. If you assume an inflation rate of 3%, your $100,000 per year in living expenses will be $103,000 after the first year. This means that your portfolio will need to generate $67,000 instead of $64,000 (remember, we’re assuming no adjustment from Social Security).

On the same $1.5 million portfolio, this means a required after-tax return of 4.5% rather than 4.3% and a pre-tax return of 6.25%.

That may not sound like much, but remember that inflation is like interest. It compounds over time. By year two, you’re looking at expenses of $106,000…and a required pre-tax return of 6.5% on that same $1.5 million portfolio.

And more than anything, you need a margin of safety. You need a little bit of “wiggle room” in the event that your investments don’t generate as much income as expected or in case inflation is higher than forecast.

I used very conservative numbers in this article, but I encourage you to do the same. It’s better to be too conservative and end up with a bigger cushion than expected in retirement than to find yourself strapped for cash and forced to give up that house on the golf course.

About the author:

Mr. Sizemore has been a repeat guest on Fox Business News, has been quoted in Barron’s Magazine and the Wall Street Journal, and has been published in many respected financial websites, including MarketWatch, TheStreet.com, InvestorPlace, MSN Money, Seeking Alpha, Stocks, Futures, and Options Magazine and The Daily Reckoning.

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